Chapter 20 Outline

Investment Decisions

A decision to invest in activities in a given country must consider many economic, political, cultural, and strategic variables. We have been discussing this issue throughout much of this book. We touched on it in Chapters 2 and 3 when we discussed how the political, economic, legal, and cultural environment of a country can influence the benefits, costs, and risks of doing business there and thus its attractiveness as an investment site. We returned to the issue in Chapter 6 with a discussion of the economic theory of foreign direct investment. We identified a number of factors that determine the economic attractiveness of a foreign investment opportunity. In Chapter 7, we looked at the political economy of foreign direct investment and we considered the role that government intervention can play in foreign investment. In Chapter 12, we pulled much of this material together when we considered how a firm can reduce its costs of value creation and/or increase its value added by investing in productive activities in other countries. We returned to the issue again in Chapter 14 when we considered the various modes for entering foreign markets.

One role of the financial manager in an international business is to try to quantify the various benefits, costs, and risks that are likely to flow from an investment in a given location. This is done by using capital budgeting techniques.

Capital Budgeting

Capital budgeting quantifies the benefits, costs, and risks of an investment. This enables top managers to compare, in a reasonably objective fashion, different investment alternatives within and across countries so they can make informed choices about where the firm should invest its scarce financial resources. Capital budgeting for a foreign project uses the same theoretical framework that domestic capital budgeting uses; that is, the firm must first estimate the cash flows associated with the project over time. In most cases, the cash flows will be negative at first, because the firm will be investing heavily in production facilities. After some initial period, however, the cash flows will become positive as investment costs decline and revenues grow. Once the cash flows have been estimated, they must be discounted to determine their net present value using an appropriate discount rate. The most commonly used discount rate is either the firm's cost of capital or some other required rate of return. If the net present value of the discounted cash flows is greater than zero, the firm should go ahead with the project.²

Although this might sound quite straightforward, capital budgeting is in practice a very complex and imperfect process. Among the factors complicating the process for an international business are these:

1. A distinction must be made between cash flows to the project and cash flows to the parent company.

2. Political and economic risks, including foreign exchange risk, can significantly change the value of a foreign investment.

3. The connection between cash flows to the parent and the source of financing must be recognized.

We look at the first two of these issues in this section. Discussion of the connection between cash flows and the source of financing is postponed until the next section, where we discuss the source of financing.

Project and Parent Cash Flows

A theoretical argument exists for analyzing any foreign project from the perspective of the parent company because cash flows to the project are not necessarily the same thing as cash flows to the parent company. The project may not be able to remit all its cash flows to the parent for a number of reasons. For example, cash flows may be blocked from repatriation by the host-country government, they may be taxed at an unfavorable rate, or the host government may require a certain percentage of the cash flows generated from the project be reinvested within the host nation. While these restrictions don't affect the net present value of the project itself, they do affect the net present value of the project to the parent company because they limit the cash flows that can be remitted to it from the project.

When evaluating a foreign investment opportunity, the parent should be interested in the cash flows it will receive--as opposed to those the project generates--because those are the basis for dividends to stockholders, investments elsewhere in the world, repayment of worldwide corporate debt, and so on. Stockholders will not perceive blocked earnings as contributing to the value of the firm, and creditors will not count them when calculating the parent's ability to service its debt.

But the problem of blocked earnings is not as serious as it once was. The worldwide move toward greater acceptance of free market economics (discussed in Chapter 2) has reduced the number of countries in which governments are likely to prohibit the affiliates of foreign multinationals from remitting cash flows to their parent companies. In addition, as we will see later in the chapter, firms have a number of options for circumventing host-government attempts to block the free flow of funds from an affiliate.

Adjusting for Political and Economical Risk

When analyzing a foreign investment opportunity, the company must consider the political and economic risks that stem from the foreign location. We will discuss these before looking at how capital budgeting methods can be adjusted to take risks into account.

Political Risk

We initially encountered the concept of political risk in Chapter 2. There we defined it as the likelihood that political forces will cause drastic changes in a country's business environment that hurt the profit and other goals of a business enterprise. Political risk tends to be greater in countries experiencing social unrest or disorder and countries where the underlying nature of the society makes the likelihood of social unrest high. When political risk is high, there is a high probability that a change will occur in the country's political environment that will endanger foreign firms there.

In extreme cases, political change may result in the expropriation of foreign firms' assets. This occurred to US firms after the Iranian revolution of 1979. Social unrest may also result in economic collapse, which can render worthless a firm's assets. This has occurred to many foreign companies' assets as a result of the bloody war following the breakup of the former Yugoslavia. In less extreme cases, political changes may result in increased tax rates, the imposition of exchange controls that limit or block a subsidiary's ability to remit earnings to its parent company, the imposition of price controls, and government interference in existing contracts. The likelihood of any of these events impairs the attractiveness of a foreign investment opportunity.

Many firms devote considerable attention to political risk analysis and to quantifying political risk. For example, Union Carbide, the US multinational chemical giant, has an elaborate procedure for incorporating political risk into its strategic planning and capital budgeting process.³ Euromoney magazine publishes an annual "country risk rating," which incorporates assessments of political and other risks (see Table 20.1 and the associated description). The problem with all attempts to forecast political risk, however, is that they try to predict a future that can only be guessed at--and in many cases, the guesses are wrong. Few people foresaw the 1979 Iranian revolution, the collapse of communism in Eastern Europe, or the dramatic breakup of the Soviet Union, yet all these events have had a profound impact on the business environments of the countries involved. This is not to say that political risk assessment is without value, but it is more art than science.

Economic Risk

Like political risk, we first encountered the concept of economic risk in Chapter 2. There we defined it as the likelihood that economic mismanagement will cause drastic changes in a country's business environment that hurt the profit and other goals of a business enterprise. In practice, the biggest problem arising from economic mismanagement seems to be inflation. Historically, many governments have expanded their domestic money supply in misguided attempts to stimulate economic activity. The result has often been too much money chasing too few goods, resulting in price inflation. As we saw in Chapter 9, price inflation is reflected in a drop in the value of a country's currency on the foreign exchange market. This can be a serious problem for a foreign firm with assets in that country because the value of the cash flows it receives from those assets will fall as the country's currency depreciates on the foreign exchange market. The likelihood of this occurring decreases the attractiveness of foreign investment in that country.

There have been many attempts to quantify countries' economic risk and long-term movements in their exchange rates. Euromoney's annual country risk rating (Table 20.1) incorporates an assessment of economic risk in its calculation of each country's overall level of risk. As we saw in Chapter 9, there have been extensive empirical studies of the relationship between countries' inflation rates and their currencies' exchange rates. These studies show that there is a long-run relationship between a country's relative inflation rates and changes in exchange rates. However, the relationship is not as close as theory would predict; it is not reliable in the short-run and is not totally reliable in the long run. So, as with political risk,
any attempts to quantify economic risk must be tempered with some healthy skepticism.

Risk and Capital Budgeting

In analyzing a foreign investment opportunity, the additional risk that stems from its location can be handled in at least two ways. The first method is to treat all risk as a single problem by increasing the discount rate applicable to foreign projects in countries where political and economic risks are perceived as high. Thus, for example, a

Rank

			Change									Debt in				Access to	Access to	Access to	Discount
Sep		Dec	Sept-				Total	Political	Economic	Debt		default or		Credit		bank	short-term	capital	on
98		97	Dec				score	risk	performance	indicators		rescheduled		ratings		finance	finance	markets	forfeiting
					Weighting:		100	25	25	10		10		10		5	5	5	5
	1	2		1	Luxembourg		98.90	24.76	25.00		10.00		10.00		10.00	5.00	5.00	5.00	4.14
	2	1		-1	United States		97.85	24.97	22.88		10.00		10.00		10.00	5.00	5.00	5.00	5.00
	3	6		3	Germany		97.06	24.89	22.21		10.00		10.00		10.00	5.00	5.00	5.00	4.96
	4	3		-1	Netherlands		96.92	24.84	22.57		10.00		10.00		10.00	5.00	5.00	5.00	4.50
	5	10		5	Austria		96.79	24.19	22.65		10.00		10.00		10.00	5.00	5.00	5.00	4.95
	6	7		1	Switzerland		96.43	25.00	21.45		10.00		10.00		10.00	5.00	5.00	5.00	4.99
	7	11		4	France		95.87	24.22	21.69		10.00		10.00		10.00	5.00	5.00	5.00	4.96
	8	4		-4	Norway		95.83	22.91	23.03		10.00		10.00		10.00	5.00	5.00	5.00	4.89
	9	5		-4	United Kingdom		95.01	25.00	20.04		10.00		10.00		10.00	5.00	5.00	5.00	4.97
	10	12		2	Ireland		94.87	23.02	22.61		10.00		10.00		9.57	5.00	5.00	5.00	4.66
	11	9		-2	Denmark		94.67	23.74	21.91		10.00		10.00		9.36	5.00	5.00	5.00	4.66
	12	13		1	Finland		94.52	22.54	22.47		10.00		10.00		9.57	5.00	5.00	5.00	4.93
	13	14		1	Belgium		94.25	23.72	21.01		10.00		10.00		9.57	5.00	5.00	5.00	4.95
	14	15		1	Sweden		93.39	23.25	21.49		10.00		10.00		8.72	5.00	5.00	5.00	4.93
	15	8		-7	Canada		93.02	22.98	21.21		10.00		10.00		8.94	5.00	5.00	5.00	4.89
	16	19		3	Spain		92.01	22.24	21.33		10.00		10.00		9.15	5.00	4.64	5.00	4.64
	17	20		3	New Zealand		91.34	22.23	19.86		10.00		10.00		9.36	5.00	5.00	5.00	4.89
	18	22		4	Italy		91.10	21.66	20.57		10.00		10.00		8.94	5.00	5.00	5.00	4.93
	19	17		-2	Australia		90.91	22.60	20.51		10.00		10.00		8.72	5.00	5.00	5.00	4.07
	20	21		1	Portugal		90.73	21.76	21.34		10.00		10.00		8.94	5.00	4.64	5.00	4.04
	21	16		-5	Singapore		89.17	23.29	19.24		10.00		10.00		9.68	5.00	4.64	4.30	3.02
	22	24		2	Iceland		89.03	21.38	21.17		10.00		10.00		7.77	5.00	4.64	5.00	4.07
	23	18		-5	Japan		88.02	23.39	15.85		10.00		10.00		10.00	5.00	5.00	5.00	3.79
	24	23		-1	Taiwan		86.49	22.28	19.52		10.00		10.00		8.72	5.00	4.64	3.30	3.02
	25	26		1	Cyprus		81.92	18.69	18.22		10.00		10.00		7.45	5.00	4.64	5.00	2.92
	26	47		21	Malta		81.75	19.84	21.94		10.00		10.00		6.81	5.00	4.64	0.00	3.52
	27	32		5	Greece		79.61	18.03	18.01		10.00		10.00		4.89	5.00	4.64	5.00	4.04
	28	27		-1	United Arab		79.38	19.20	17.51		10.00		10.00		6.81	5.00	4.02	3.30	3.54
					Emirates
	29	28		-1	Kuwait		77.70	18.34	17.50		10.00		10.00		6.38	5.00	4.40	2.72	3.36
	30	31		1	Chile		76.60	18.56	17.29		8.63		10.00		5.96	5.00	3.75	3.40	4.02
	31	33		2	Israel		76.06	17.22	15.96		10.00		10.00		6.17	5.00	4.35	3.77	3.59
	32	25		-7	Hong Kong		75.75	19.32	16.20		10.00		10.00		7.02	5.00	5.00	3.21	0.00
	33	37		4	Slovenia		74.49	17.56	17.34		9.57		10.00		6.38	3.04	3.45	3.58	3.56
	34	34		0	Saudi Arabia		73.68	17.43	15.20		10.00		10.00		4.26	5.00	4.64	3.68	3.47
	35	41		6	Qatar		72.68	16.77	14.53		10.00		10.00		4.89	5.00	4.64	3.30	3.54
	36	42		6	Bahrain		71.97	15.77	16.52		10.00		10.00		3.62	5.00	4.64	3.06	3.36
	37	43		6	Oman		71.47	16.74	14.23		10.00		10.00		4.57	5.00	4.64	3.11	3.18
	38	48		10	Poland		71.11	17.60	18.45		9.50		10.00		4.47	0.22	3.21	3.87	3.79
	39	45		6	Hungary		71.06	17.16	17.84		8.02		10.00		4.68	3.58	2.44	4.06	3.29
	40	44		4	Czech Republic		71.01	17.58	16.99		9.34		10.00		5.96	1.14	3.15	3.96	2.88
	41	39		-2	China		67.26	17.08	16.32		9.65		10.00		5.96	0.01	2.68	2.83	2.74
	42	30		-12	South Korea		64.47	15.11	14.06		10.00		10.00		3.62	5.00	3.87	2.26	0.55
	43	52		9	Tunisia		63.43	15.43	15.16		8.86		10.00		4.26	0.10	3.45	3.02	3.15
	44	58		14	Uraguay		62.88	13.06	17.42		9.19		10.00		4.26	0.05	3.33	2.74	2.83
	45	56		11	Colombia		62.85	13.31	13.68		8.59		10.00		4.26	3.09	3.51	3.11	3.29
	46	99		53	Trinidad & Tobago		61.99	17.74	16.52		9.02		10.00		3.62	0.00	3.21	1.89	0.00
	47	50		3	Mexico		61.75	14.25	15.16		8.38		10.00		2.98	1.69	3.48	3.30	2.51
	48	54		6	Argentina		61.33	13.73	15.58		8.36		10.00		2.77	1.05	4.17	3.40	2.29
	49	62		13	Egypt		61.22	14.83	15.01		9.12		9.93		4.04	0.00	2.50	2.64	3.15
	50	46		-4	South Africa		61.09	14.96	13.26		9.53		10.00		3.62	0.07	3.51	3.40	2.74
	51	60		9	Estonia		61.08	13.52	15.88		9.95		10.00		5.32	0.00	2.01	2.49	1.92
	52	63		11	Botswana		59.85	15.90	19.05		9.81		10.00		0.00	0.00	3.51	1.58	0.00
	53	35		-18	Malaysia		59.70	15.25	12.47		9.28		10.00		4.47	3.22	3.51	1.51	0.00
	54	51		-3	Thailand		59.24	14.00	12.26		9.05		10.00		3.83	4.23	2.98	2.26	0.64

			Change									Debt in				Access to	Access to	Access to	Discount
	Sep	Dec	Sept-				Total	Political	Economic	Debt		default or		Credit		bank	short-term	capital	on
	98	97	Dec				score	risk	performance	indicators		rescheduled		ratings		finance	finance	markets	forfeiting
					Weighting:		100	25	25	10		10		10		5	5	5	5
55		57		2	Philippines		58.42	13.69	14.54		9.04		10.00		3.62	1.30	3.33	2.17	0.73
56		69		13	Morocco		57.90	13.10	14.04		8.42		10.00		3.30	0.12	3.10	2.94	2.88
57		64		7	Latvia		57.65	12.65	13.99		9.92		10.00		4.89	0.00	2.01	2.26	1.92
58		61		3	Slovak Republic		57.35	13.11	13.08		9.17		10.00		4.04	1.66	2.22	2.60	1.46
59		53		-6	India		57.11	14.46	13.86		9.05		10.00		3.30	0.14	1.67	2.17	2.47
60		68		8	Costa Rica		56.28	13.48	16.94		9.16		10.00		2.98	0.00	3.15	0.57	0.00
61		59		-2	Turkey		56.22	13.48	13.72		8.86		10.00		1.49	1.35	3.21	2.64	1.46
62		70		8	Lithuania		56.20	11.60	14.21		9.79		10.00		3.83	0.30	2.01	2.55	1.92
63		66		3	Jordan		55.15	12.89	15.21		8.09		9.33		2.34	0.00	1.79	2.45	3.04
64		114		50	Dominican Republic		54.80	16.82	14.34		9.30		9.93		1.70	0.00	2.32	0.38	0.00
65		86		21	Jamaica		54.38	16.36	12.56		8.22		10.00		2.34	0.00	2.92	1.98	0.00
66		72		6	Croatia		54.29	11.97	13.65		9.61		5.59		4.26	1.87	1.64	2.83	2.88
67		65		-2	El Salvador		53.03	10.95	14.53		9.45		10.00		3.62	0.00	3.21	1.27	0.00
68		73		5	Lebanon		53.01	11.13	10.65		9.47		10.00		2.13	1.73	1.96	2.92	3.02
69		36		-33	Brunei		52.79	20.55	0.00		10.00		10.00		0.00	5.00	4.40	2.83	0.00
70		67		-3	Brazil		52.56	11.69	12.92		8.57		9.98		1.91	1.70	1.55	2.83	1.42
71		55		-16	Panama		51.40	12.56	16.44		8.55		3.35		4.26	0.59	3.48	2.17	0.00
72		75		3	Peru		50.43	10.89	14.51		8.37		7.25		2.66	0.16	2.62	2.04	1.92
73		76		3	Guatemala		49.37	9.31	13.97		9.45		10.00		2.98	0.00	3.10	0.57	0.00
74		131		57	St Lucia		48.04	18.78	6.59		9.67		10.00		0.00	0.00	2.62	0.38	0.00
75		81		6	Paraguay		47.83	10.10	13.03		9.64		10.00		1.70	0.07	2.92	0.38	0.00
76		71		-5	Venezuela		47.33	9.83	11.66		8.87		10.00		1.91	0.39	2.86	1.81	0.00
77		38		-39	Mauritius		47.32	15.44	0.00		9.30		10.00		4.89	0.27	3.51	1.98	1.92
78		84		6	Bolivia		47.16	11.26	12.88		8.03		8.83		2.02	0.91	2.08	1.13	0.00
79		87		8	Papua New Guinea		47.15	10.48	12.22		9.05		10.00		0.00	2.16	2.86	0.38	0.00
80		80		0	Fiji		46.91	11.32	13.10		9.87		10.00		0.00	0.00	2.62	0.00	0.00
81		82		1	Kazakhstan		46.73	7.50	12.02		9.64		10.00		2.55	1.66	1.56	1.79	0.00
82		74		-8	Romania		46.25	10.27	9.60		9.41		10.00		2.13	0.05	1.98	1.36	1.46
83		83		0	Sri Lanka		45.65	10.53	12.64		9.06		10.00		0.00	0.00	2.38	1.04	0.00
84		40		-44	Bahamas		44.89	19.02	12.79		0.00		0.00		6.17	0.00	4.64	2.26	0.00
85		79		-6	Ghana		44.87	10.61	11.18		7.89		9.86		0.00	2.57	2.38	0.38	0.00
86		100		14	Ecuador		44.84	8.13	12.35		8.27		9.97		1.70	0.00	2.92	1.51	0.00
87		77		-10	Vietnam		43.97	10.11	11.04		8.33		9.91		1.70	0.00	1.96	0.91	0.00
88		49		-39	Indonesia		43.56	8.89	8.49		8.18		10.00		0.21	3.97	2.50	1.32	0.00
89		110		21	Iran		43.26	10.74	9.66		9.92		10.00		0.00	0.00	1.16	0.23	1.55
90		95		5	Zimbabwe		43.22	9.40	9.81		8.50		10.00		0.00	1.25	3.21	1.04	0.00
91		90		-1	Uganda		43.00	7.85	14.09		8.65		10.00		0.00	0.00	2.02	0.38	0.00
92		97		5	Côte d'Ivoire		42.71	8.73	11.37		6.41		9.78		0.00	2.61	2.68	1.13	0.00
93		101		8	Bulgaria		42.30	9.40	10.30		7.95		9.98		1.38	0.43	1.55	1.32	0.00
94		98		4	Gabon		42.26	8.66	13.72		8.53		8.47		0.00	0.00	2.50	0.38	0.00
95		106		11	Senegal		42.24	7.74	13.31		8.60		9.78		0.00	0.00	2.44	0.38	0.00
96		93		3	Bangladesh		41.45	8.24	11.55		9.04		10.00		0.00	0.00	2.38	0.23	0.00
97		89		-8	Barbados		41.43	16.21	6.90		0.00		10.00		3.62	0.00	3.57	1.13	0.00
98		96		-2	Kenya		40.97	8.96	10.47		8.20		10.00		0.00	0.00	2.32	1.02	0.00
99		103		4	Syria		40.58	9.43	9.23		8.11		10.00		0.00	0.00	1.25	0.28	2.29
100		108		8	Mali		40.47	7.96	11.94		7.91		9.91		0.00	0.00	2.38	0.38	0.00
101		158		57	Guyana		40.44	13.24	11.24		6.53		7.62		0.00	0.00	1.43	0.38	0.00
102		136		34	Honduras		40.32	8.37	10.86		7.66		9.79		0.00	1.06	2.20	0.38	0.00
103		111		8	Algeria		39.64	9.38	10.25		8.20		8.47		0.00	0.00	1.96	1.02	0.37
104		143		39	St. Vincent		39.41	17.47	0.00		8.71		10.00		0.00	0.00	2.86	0.38	0.00
					& Grenadines
105		92		-13	Uzbekistan		39.03	5.55	10.62		9.75		10.00		0.00	0.00	1.55	1.56	0.00
106		91		-15	Nepal		38.80	9.61	6.90		9.11		10.00		0.00	0.00	2.80	0.38	0.00
107		102		-5	Yemen		38.73	8.30	10.19		8.30		10.00		0.00	0.00	1.56	0.38	0.00

			Change									Debt in				Access to	Access to	Access to	Discount
	Sep	Dec	Sept-				Total	Political	Economic	Debt		default or		Credit		bank	short-term	capital	on
	98	97	Dec				score	risk	performance	indicators		rescheduled		ratings		finance	finance	markets	forfeiting
					Weighting:		100	25	25	10		10		10		5	5	5	5
108		161		53	Haiti		38.16	7.39	10.16		9.22		9.97		0.00	0.00	1.43	0.00	0.00
109		162		53	Grenada		37.76	15.25	0.00		9.52		10.00		0.00	0.00	2.62	0.38	0.00
110		146		36	Dominica		37.75	15.51	0.00		9.24		10.00		0.00	0.00	2.62	0.38	0.00
111		148		37	Mongolia		37.71	7.09	10.31		9.04		10.00		0.00	0.00	0.89	0.38	0.00
112		105		-7	Burkina Faso		37.71	5.99	10.70		9.07		9.52		0.00	0.00	2.14	0.28	0.00
113		137		24	Ethiopia		37.51	5.42	13.88		6.40		10.00		0.00	0.00	1.43	0.38	0.00
114		29		-85	Bermuda		37.38	21.53	0.00		0.00		0.00		8.94	0.00	4.64	2.26	0.00
115		112		-3	Benin		37.33	3.77	13.41		8.86		8.88		0.00	0.00	2.02	0.38	0.00
116		142		26	Azerbaijan		37.28	5.00	10.43		9.89		10.00		0.00	0.00	0.89	1.06	0.00
117		128		11	Madagascar		36.83	8.04	9.02		8.32		10.00		0.00	0.00	1.07	0.38	0.00
Euromoney Risk Assesment						Euromoney's assessment of country risk uses three categories. These are analytical indicators, 40%; credit indicators, 20%; and market indicators, 40%. These offer a broad but sensitive evaluation of the relative risks faced by exposure in these countries.
Analytical Indicators						This 40% is made up of political risk, 20%; economic risk, 10%; and economic indicators, 10%. Political risk is a measure of stability and the potential fallout from any instability. The economic indicators consist of three key ratios: the debt-service-to-export ratio as a measure of liquidity, and balance-of-payments-to-GNP and external-debt-to-GNP as measures of solvency. As these are historical, the prospective view of economic performance to 1993 is used to gauge economic risk.
Credit Indicators						This 20% is made up of payment record, 15% and ease of rescheduling, 5%. Ease of rescheduling indicates a country's general creditworthiness in the face of temporary liquidity problems.
Market Indicators						These consist of access to bond markets (FRN, straight, and Yankee), 15%; availability of short-term finance, 10%; and access to and discount available on forfeiting, 15%. Bond market access is fine-tuned by considering access to syndicated loans, credit ratings, and secondary market spreads. The attitudes of the market to countries will incorporate analytical and credit indicators, but its favor can be crucial to sustaining a country's economy as well as maintaining liquidity for its sovereign debt in the secondary markets.

Table 20.1

Euromoney Magazine's Country Risk Ratings

firm might apply a 6 percent discount rate to potential investments in Great Britain, the United States, and Germany, reflecting those countries' economic and political stability, and it might use a 20 percent discount rate for potential investments in Russia, reflecting the political and economic turmoil in that country. The higher the discount rate, the higher the projected net cash flows must be for an investment to have a positive net present value.

Adjusting discount rates to reflect a location's riskiness seems to be fairly widely practiced. For example, a study of large US multinationals found that 49 percent of them routinely added a premium percentage for risk to the discount rate they used in evaluating potential foreign investment projects.⁴ However, critics of this method argue that it penalizes early cash flows too heavily and does not penalize distant cash flows enough.⁵ They point out that if political or economic collapse were expected in the near future, the investment would not occur anyway. (This is borne out today in the case of Russia; Western companies are not investing there because they perceive the imminent danger of political and economic collapse.) So for any investment decisions, the political and economic risk being assessed is not of immediate possibilities, but rather of some distance in the future. Accordingly, it can be argued that rather than using a higher discount rate to evaluate such risky projects, which penalizes early cash flows too heavily, it is better to revise future cash flows from the project downward to reflect the possibility of adverse political or economic changes sometime in the future. Surveys of actual practice within multinationals suggest that the practice of revising future cash flows downward is almost as popular as that of revising the discount rate upward.⁶